Bill Bozeman is the CEO and president of PSA Security Network, the world's largest electronic security cooperative, representing security systems integrators.
Wendy Carlisle is a member of the Electronic Security Association and an attorney who specializes in security law with the law firm of Leonard, Street and Deinard in Minneapolis.
Service and maintenance contracts make the security world go round. No dealer should leave the customer’s premises until a signed agreement is tucked into the client folder and on the books.
Face a fact of business life: There is not that much money in selling hardware today. Integrators and dealers have to work on the service aspect of every sales call to generate more revenue.
There are labor-only contracts, parts-only contracts and retainer plans. Each can have its place depending on the customer’s needs.
“Contracts are long for a reason and most of that legalese is important to protect your interest in the alarm equipment you installed and to protect your business should you get sued,” said Wendy Carlisle, a member of the Electronic Security Association and an attorney who specializes in security law with the law firm of Leonard, Street and Deinard in Minneapolis. “In case you are ever sued, the most important provisions are exculpatory clauses, limiting liability and damages in the event the customer has a loss. Also important is a provision that prohibits the customer’s insurer from pursuing subrogation,” she said.
“And, remember the contract does no good unless you have your customer sign it and you have a copy readily available,” Carlisle said. Both parties also need to understand what the contract says.
“Keep it simple,” said Rob Simopoulos, vice president of Advance Technology, Scarborough, Maine. He says that his experience is that giving a customer too many options simply confuses them. Instead, he offers customers an agreement that covers all of the customer’s needs without bogging them down in details.
“A lot of customers are more technology savvy these days but they are looking to the integrator to provide the solution they need. A good integrator should offer the single package that meets the customer’s needs and support requirements,” he said.
“I’ve learned that, if you give the customer too many options, it gets too complicated,” he added.
That said, Simopoulos said they offer a “unique approach” that guarantees, in the contract, all of the key elements of the buyer’s system. Each setup is different since everything they do is customized to a particular customer. Agreements which include managed services, card replacement, running reports and the likes are common. Most contracts include support, maintenance, parts and labor and maintenance. How many times does a customer neglect to update license keys prior to expiration? With in-house, proactive monitoring of such events, that problem is gone.
“The integrator has to look at all the aspects that come into play when they say they will cover ‘everything.’ Labor is very volatile…what if you budget four hours for a job and it takes 20?” asked Matthew Ladd, president, The Protection Bureau, Exton, Pa. He said about 80 percent of their Philadelphia-area clients have retainer plan contracts.
“When you offer a plan to a client, be sure to cover all your bases,” he added. The Protection Bureau offers a variety of plans to its customers. “We have up to eight variables for time, response, software upgrades, testing,” Ladd said.
“The simpler the system, the simpler the contract,” said Bill Bozeman, CPP, CHS, president and CEO of PSA Security Network, Westminster, Colo. He noted that a burglar alarm system agreement can probably make do with a boiler plate contract. “If you are integrating different parts and pieces, the answer is definitely different.”
“Every contract should have a very detailed maintenance agreement including service, parts and labor, on-site response time whether 8 to 5 Monday through Friday or 24/7 maintenance,” Bozeman said.
“Customers expect to be offered service contracts,” Bozeman said. These days, even the simplest purchase—a toaster or calculator—comes with an offer for a service agreement. When an integrator is working with a hospital or industrial site that runs 24/7/365, they better be prepared with a detailed contract offering.
The nature of the customer
For example, “next-day service won’t cut it at a refinery or power plant that needs its security up and running,” Bozeman said.
There is a major down-side to not offering contracts. “If you are not offering service, you look more like a contractor who puts something in and leaves,” Bozeman warned. “In the integrator business, you must offer things like software upgrades, dial-in or on-site service.”
“The contract should provide for the customer to test the system regularly, typically weekly,” Carlisle said, adding that the dealer should schedule testing of the system at least annually, perhaps more frequently depending on the customer’s needs and risks.
While Advance Technology’s contracts offer the standard parts, labor and maintenance verbiage, the company has gone a giant step beyond that. They include proactive managed services and remote support in all of their agreements.
Carlisle draws a distinction between national and local integrators and their contracts. “With national security businesses, the contracts really vary from state-to-state, because each state’s law is unique as far as what language to use, what font size in type, etc.,” she said. “But, within a state, most security businesses have form contracts for monitoring, installation and leases.”
The new contract offering from Advance Technology came as the result of a post-sale, “handshake” meeting with a satisfied customer who loved their new camera system. When the sales rep went into the control room, he immediately noticed one camera was out. It was a brand-new system. “That sparked our proactive service offering,” Simopoulos said.
“There are engineers in our office who provide proactive support for video, patient monitoring and other services,” Simopoulos said. “Our engineers are always checking for specific anomalies.” Not only do they check that all devices are online, they also check camera focus, hard-drive function and that recording devices are working.
Put specifics in writing
Depending on the application, that may mean daily, weekly or monthly monitoring of all devices. Advance guarantees one-hour remote service (thanks to IP and managed switches, remote diagnostics is easier to provide) and same-day on site technician services. “Usually, it’s about four hours,” Simopoulos said.
For advanced life safety applications and other situations where a threat is known (for example, a jewelry store) or a residential customer who wants a security system because an ex has tried to harm him/her before, the alarm company really must provide a heightened level of service, Carlisle said.
This means offering a comprehensive security assessment, state-of-the-art equipment and documenting everything that was offered to the customer and what the customer declined.
“You should also take careful and thorough notes on the location, manufacturer and model number of all equipment installed and document all testing of the alarm system that was completed,” Carlisle advised.
“Spell out the exceptions,” Ladd urged integrators. There are many instances. What happens when a door contractor provides electric locks? Does the security integrator cover service? Or does the door guy?
“Software licenses are another item,” Ladd said. “They are a different item than software support. And how do you handle warranties?” Alarm panels, for example, have one-year warranties. A camera may be covered for three or five years.
Whatever the contract states, it is vital that the document is in line with the best practices that the company has established for itself and its customers.
The contract has to spell out what is meant by “four-hour response.” Is that getting a truck on-site or is it getting a call-back from the service department? Does a remote fix count?
Contracts must also define how the integrator is paid. “The best contracts have pre-negotiated rates,” Ladd said.
They must specify how many upgrades and patch installations are covered. An unlimited contract assures the customer is always current. But is the security dealer responsible for compatibility issues when the client decides to upgrade everything to Windows 8? However, the dealer must remember that APIs can change as equipment is upgraded. Upgrading access control may affect the video and that, in turn, may affect cameras. Suddenly, a lot of time is being invested by the integrator.
There are legal pitfalls a dealer must avoid. “Unfortunately, there are many,” Carlisle said. Foremost, the law changes frequently—both through legislation and court decisions.
“It is important to review your contracts with an attorney regularly to make sure they comply with your state’s law,” Carlisle said. “Also, your contract should be tailored for your state, not a cookie-cutter document.”
“Be wary of automatic contract renewals,” she continued. “Many states are enacting laws with which you must comply for the contract to renew.”
“And be wary of leases,” Carlisle said. “If you are leasing security equipment, you likely need to comply with federal truth in lending regulations.”
To any of these issues, there are no right or wrong answers—unless terms are not delineated. That always is wrong.
Making money due to you
That said, contracts must give the integrator the ability to make money. “We look at the profitability of every service contract that will be renewed in the next three months,” Ladd said. They check to be sure they are making enough money. They also examine if their rates are too high or perhaps they have charged to much in some circumstances. “We may give the client a credit for the next year’s service,” Ladd said. “We don’t give dollars back. But the clients who get a credit remain our happiest customers.”
“Service agreements are priced all over the place,” Bozeman said. That is because certain systems are more prone to maintenance.
It used to be that a good rule of thumb was to charge one percent per month or 12 percent annually based on hardware and software minus labor.
It would be silly, however, to price service on a fixed IP-camera system with solid-state storage the same way one prices a nitrogen-purged system with PTZ in domes. Thus, therein lies the need for contract specifics.
First, Bozeman recommended, decide whether it is a software, maintenance or service agreement you are writing. Whatever the case, it likely will not have the same sort of exit valuation that a burglar alarm system has.
“The reason is the RMR for the burglar alarm is stable and mature. Attrition is built into the calculation. Gross profit on an alarm is a good bit higher than on a system,” Bozeman explained.
A service contract is lucky to deliver 36 to 40 percent where a standard alarm contract will have 75 to 80 percent gross margin. On the other hand, an alarm contract probably brings $30 a month in RMR. A comprehensive software, hardware and monitoring service contract may bring in $3,000 a month or more.
Because the cash for a retainer plan is paid up front, mobilization charges typically are waived. “A retainer plan gives the client the VIP status they want,” Ladd noted. “It assures them you will be there.”
More important, perhaps, than getting the client to buy the service plan, is assuring your own sales team understands the value of contracts. What if the client’s NVR breaks? Can the sales team explain why your $20,000 umbrella contract is better than the competitor’s $10,000 parts-only contract?
“How do you create value?” Ladd said. “The client must appreciate the fact that we provide a loaner NVR while theirs is being repaired. They have to see the advantage of having all software upgrades and patches covered whether it is one a year or 10 a year.”
That kind of thinking makes a “stickier” customer and a more profitable security company.
Curt Harler is a regular contributor to SD&I magazine; he can be reached at email@example.com.